China trade deal bullish for stocks

WeekendInvestor

LOS ANGELES (CBS.MW) -- Wherever you stand on the China trade issue, at least there's one thing people generally agree upon: opening up the Communist country's markets will be good for American business.

"It's a very, very positive trade agreement...(U.S. businesses) will have new sources of revenue that will translate to the bottom line." Kim Wallace Lehman Bros.

And what's good for American business ultimately will lead to higher stock prices as sales and profits rise across many industries, said Kim Wallace, chief political strategist at Lehman Brothers.

"It's a very, very positive trade agreement," he said. The deal will benefit "well-financed, well-positioned U.S. businesses with the vision and money to enter China. They'll have new sources of revenue that will translate to the bottom line - new lines of revenue that aren't figured into estimates today."

This week, the House of Representatives voted to give China "permanent normal trade relations" status, a move that eventually will ease its entry into the World Trade Organization and open China's market to foreigners.

Under the trade agreement, Chinese taxes or tariff will drop to an average 17 percent from 23 percent -- making U.S. goods cheaper there, Wallace said. Import quotas -- the limit on how much goods China can take in yearly according to industry -- will disappear.

The agricultural, telecommunications, financial services and auto industries quickly stand to gain from an open Chinese market, he said. Companies such as Boeing
BA, +3.77%
also will benefit, he said.

The Seattle-based aerospace company is one of several American companies he favors in light of the deal. The others are Qualcomm
QCOM, +1.37%
IBM
IBM, +0.47%
and Chinadotcom
CHINA, -2.24%
See .

Once China gains entry into the WTO, it will have to abide by the same rules as all the other members, Wallace said.

How can a third-world country with average per capita income of less than $1,000 a year afford U.S. goods and services?

Lawrence Lau, senior fellow at Stanford University's Hoover Institution and an economics professor, contends that a lot of sales will be to Chinese businesses. As for the consumer market, Lau said the richest 5 percent of the population -- about 60 million people -- can afford imported goods. The number of customers also will grow as open trade enriches more Chinese people.

To be sure, the road from potential riches to real profits is paved with many pitfalls, as many companies realized during the rush towards this market in 1990s. They grappled with issues ranging from government flip-flops to widespread graft and corruption. But analysts say American businesses with a Chinese presence already deal with these problems there. The trade agreement just loosens Chinese control over business.

Entry into "the World Trade Organization and (getting) permanent normal trade relations level the playing field," said Chris Legallet, chief investment officer for Newport Pacific Management, a specialist in Pacific region and international investments that manages $3.5 billion in assets.

Market action and top news

News that the House voted in favor of PNTR for China lifted stocks mid-week on high volume, spurring hopes that the market finally has seen a bottom and big money from institutional investors have come back. But those hopes were deflated later in the week as the buying spree flagged.

The Dow Jones Industrial Average ended Friday at 10,299.24, down 3.1 percent for the week, while the Nasdaq was down 5.5 percent to 3,205.11 and the S&P dropped 2.1 percent to 1,378.02. See .

What's critical in coming weeks is more follow-through days for the market -- an up day on high volume again -- a lift in the strongest stocks, and better market breadth, before a bottom is in sight.

Other top news of the week:

The U.S. economy grew at 5.4 percent in the first quarter, confirming an earlier estimate. However, it took a breather in the second quarter according to several economic reports, perhaps a sign that the Fed's interest-rate hikes have begun to take hold.

The government filed a final proposal in court calling for the break-up of Microsoft into two companies, with relatively minor technical revisions. Earlier this week, a federal judge questioned whether a two-way split would go far enough, fueling reports that the software giant might be broken up into three companies.

AT&T's purchase of cable giant Media One cleared one regulatory hurdle, getting a nod from the Justice Department, on the condition that an ownership interest in broadband services provider Road Runner is divested.

United Airlines said it'll buy U.S. Airways for $11.6 billion, sparking speculation that other airline mergers are coming.

Ford is buying Land Rover from BMW for $2.7 billion, expanding its truck portfolio with an upscale brand.

Intel unveiled its latest processor, a Pentium III capable of operating at 933 megahertz. But rival Advanced Micro Devices already introduced a similar processor in March.

Merck and Schering-Plough have agreed to work together to develop new cholesterol and respiratory drugs.

Disney's ABC network and Time Warner Cable reached a deal guaranteeing retransmission of ABC station signals through May 2006, officially ending a dispute that led to a black out of the network in major markets earlier this month.

See CBS.Markewatch.com's . stories of the week.

Investing tip: Reader Shawn Hofland of Newport Beach, Calif. learned the hard way to be more flexible with limit orders. Last year, he placed an order to buy Qualcomm at $56 a share when the stock was trading at $58. He had done his research and thought the stock could easily be worth $100. But his order was never filled and the stock shot up to a pre-split price of $800. "My advice is, if you like the stock and see value in it, buy it! Don't try to ground out a couple of extra bucks." Got a good tip from experience? Share it. Email Weekend Investor.

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